This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ANKARA 006165 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA AND MC KIBBEN 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN PGOV TU
SUBJECT: PRIVATIZATION UPDATE 
 
REF: A. ANKARA 1447 
     ¶B. ANKARA 2130 
     ¶C. ANKARA 5075 
     ¶D. ANKARA 1913 
     ¶E. ANKARA 6144 
 
 
¶1.    (SBU) Summary. After years of slow motion on 
privatization, IMF conditions and the AK government,s more 
business-oriented approach seems to have led to a decisive 
phase in Turkey,s privatization program. How serious the GOT 
has become will be known by the end of the year, by when 
three of the largest SEEs (Tekel, Tupras and Petkim) are 
scheduled to have been sold. In 2004, a second wave of 
important sales is supposed to occur. End Summary. 
 
 
TEKEL 
¶2.    (U) As noted in Ref A, Tekel,s tobacco operations have 
attracted substantial interest from, among others, Phillip 
Morris, British American Tobacco, and Japan Tobacco. Press 
reports value the tobacco subsidiaries at between $1.7 
billion and $4.0 billion, which reflect primarily the 
difficulty of determining how much new capital is needed to 
modernize the operations. Although the alcohol subsidiaries 
are also for sale, they represent only about 20% of the value 
of the company and have not attracted as much interest. 
 
 
¶3.    (SBU) Bids for Tekel were originally due on September 
26, but the deadline has since been extended to October 24. 
Privatization Authority (PA) VP Ayhan Sarisu has assured 
econoffs that the deadline will not be extended further. 
Sarisu said that the main reason for the extension is that 
bidders are having difficulty completing their due diligence. 
Also, the PA is experiencing difficulty with Tekel,s real 
estate, which is to be conveyed to the state in satisfaction 
of unpaid taxes (Ref A). 
 
 
¶4.    (SBU) Post surmises, however, that the main reason for 
the delay is that Phillip Morris is having difficulty 
obtaining Competition Authority (CA) approval, which is a 
condition of the sale. Tekel has a 58% market share, while 
Phillip Morris has a 31% market share. The PA is trying to 
convince the CA to permit a sale to Phillip Morris without 
imposing potentially onerous antitrust conditions upon it, 
but to date has met with stiff resistance due to the 89% 
market share that the combined operations would achieve. The 
CA and others (including potential bidders) have urged the PA 
to sell the tobacco business in pieces, which would both 
attract more bidders (since the cost of entry would be lower) 
and lessen competitive concerns. However, the PA advises 
econoffs that it cannot sell the company by year end if it 
first must restructure it. Phillip Morris executives tell 
econoffs that, if they cannot obtain regulatory approval, BAT 
may have the edge. 
 
 
¶5.    (SBU) The Turkish press reports that the PA has 
instituted a pre-sale retirement program that will reduce 
Tekel,s workforce by 3,000 from 30,500, to &ease the way8 
for Tekel,s new owner. However, private analysts believe 
that thousands more workers must go. (Per Ref A, Phillip 
Morris believes that over 90% of the tobacco operations 
workers are redundant.) 
 
 
¶6.    (SBU) Recent legislation promises Tekel a five year 
period of gradually declining restrictions on entry by 
competitors into the market, which the GOT openly admits is 
intended to maximize the sale price (Ref A). Although Tekel 
also receives tariff protection, the PA has advised econoffs 
that it has made no commitment as to future tariff levels. 
 
 
¶7.    (SBU) During a September 17 meeting, PA Acting VP Ayhan 
Sarisu told econoffs that sale terms are simple and 
standardized. Terms will be either all cash, or 50% cash with 
two yearly installments at 7% interest. In prior sales, the 
PA has generally granted credit terms to bidders, since most 
bidders have not had the financial wherewithal to pay cash. 
However, all of the investors interested in the Tekel tobacco 
operations can pay cash and, given the proffered interest 
rate, Sarisu expects that the winning bidder will choose to 
do so. The PA can either accept the highest bid, or put the 
finalists through an open auction, which could occur as early 
as November. 
 
 
TUPRAS 
¶8.    (SBU) The PA intends to sell the state,s 66 percent 
stake, retaining only a &golden share8 to guarantee a 
continued supply of refined petroleum products to the Turkish 
military. There are no other restrictions on the purchaser,s 
ability to reduce capacity or production levels (currently, 
85-88% of capacity). Although Tupras has an estimated 76% 
market share and supplies a majority of Petkim,s feedstock, 
PA VP Koktas claimed that the sale will not attract 
Competition Authority attention, since Tupras, market share 
will not increase as a result of the sale, and Tupras, 
individual refineries complement each other, and cannot 
realistically be sold other than as a going concern. 
(Nevertheless, a World Bank official with whom econoffs spoke 
expressed concern about the competition issues.) 
 
 
¶9.    (SBU) The sale has attracted much attention, from 
Russian companies, domestic investors, and consortiums. The 
PA is not aware of any interest by U.S. companies, but notes 
the possibility that they are participating in consortia. The 
PA expects 3-4 companies to be serious bidders. Analysts 
expect the company to sell for up to $2 billion. 
 
 
¶10.   (SBU) Bids had been due October 2 (itself an extended 
date), but the PA has extended the deadline to November 23. 
PA VP Koktas has given two reasons for the extension: First, 
bidders have requested additional time in which to complete 
their due diligence; and second, when Parliament reconvenes 
in October, the GOT will submit a new law that will 
liberalize the petroleum market. This law will permit 
refineries to engage in distribution activities, which should 
increase the value of Tupras. The GOT expects Parliament to 
approve this law quickly. 
 
 
¶11.   (SBU) In September, Tupras employees staged brief work 
stoppage. However, Koktas has told econoffs that Tupras 
itself does not have excess workers and that the stoppage was 
intended to protest the privatization of Petkim, whose 
workers belong to the same union. 
 
 
PETKIM 
¶12.   (SBU) The unfortunate history of this privatization is 
detailed in Ref C. The bidding was reopened on August 26, 
2003, with a November 18, 2003 deadline. The PA, and all five 
prior bidders, agree that at least $1 billion in capital will 
need to be invested in order to modernize the company. As 
such, the Uzan bid of $605 million, while criticized by 
President Erdogan and others as &cheap,8 would appear to be 
at the high end. PA expects a sale by year-end. 
 
 
ELECTRICITY SECTOR 
¶13.   (SBU) Under the Electricity Market Law, the state's 
generation assets and most of the distribution assets (but 
not the transmission system) are to be privatized. The 
national grid has been divided into thirty-three distribution 
grids, and turned over to the PA, which to date has sold one. 
Prior to sale of the others, the independent regulatory 
agency EMRA is supposed to establish regional tariffs that 
will more closely reflect actual costs (and thus render the 
grids more attractive); however, per Ref E, this effort is 
currently deadlocked, for political reasons. Another problem 
is pending litigation that resulted when the GOT canceled 14 
regional operating contracts in order to permit a full 
ownership sale. The World Bank thinks that the main problem 
is &too many players.8 No easy or quick solution can be 
expected. 
 
 
NATIONAL LOTTERY 
¶14.   (SBU) PA officials have advised econoffs that the sale 
will be finalized early in 2004, and should produce around $1 
billion. Turkish conglomerates Koc and Sabanci say they 
intend to submit a joint bid for the lottery license. 
 
 
SEKER 
¶15.   (U) Three factories of the sugar parastatal, Seker, 
have been prepared for sale in early 2004; the remaining 25 
will be sold once legal and administrative problems are 
resolved. 
 
 
TURK TELEKOM 
¶16.   (U) On September 17, Transportation Minister Binali 
Yildirim said the timetable for Telekom,s privatization will 
be announced at the end of October. Council of Ministers 
approval of a privatization strategy for Telekom is a 
requirement of the IMF,s Sixth Review. The GOT has approved 
regulations lifting Telekom,s landline monopoly at the end 
of the year.  Turkish conglomerates Koc and Sabanci say they 
intend to submit a joint bid for Telekom. On this issue, the 
World Bank believes that the GOT is making &good progress.8 
 
 
TURKISH AIRLINES 
¶17.   (SBU) The Ref D prediction that privatization in 2003 
would be difficult has come to pass. On September 16, the PA 
announced that it is postponing privatization to 2004, due to 
 lack of demand.  The PA believes that the best option in 
current market conditions is a 10% IPO. 
 
 
WORKFORCE REDUCTIONS 
¶18.   (SBU) The SEEs under the PA portfolio are thought to 
require a workforce of about 10,000 (Ref B). However, they 
currently employ 71,618 employees: 52,438 full-time workers; 
6,538 &temporary workers8 (&temporary8 in name only); and 
12,642 civil servants (who cannot be laid off and thus must 
be transferred). In a September 16 meeting, PA Employment 
Department Head Veysel Tekeloglu confirmed to econoffs that 
GOT,s year end IMF program workforce reduction target for 
all SEEs is 45,000 workers, of which 21,000 are to come from 
the PA SEEs. By the end of August, PA had achieved a 
reduction of 14,500 workers, so it is hopeful it will achieve 
its year end numbers. To this end, Tekel is the most 
important company in the PA portfolio, with 24,000 workers. 
If the PA can sell it by year end, then PA will easily meet 
its target.  If Petkim and Tupras are also sold before year 
end, then some 9,000 more workers will be removed from the 
state payroll, thus ensuring that GOT,s overall SEE 
workforce reductions will be met. 
 
 
COMMENT 
¶19.   (SBU) If (as the PA and GOT confidently predict) Tekel, 
Tupras and Petkim are sold close to schedule (by year end or, 
at the latest, the end of January, 2004), the 2003 program is 
likely to be judged by the IFIs to be acceptable. PA 
management recognizes that meeting its 2003 targets is but 
the end of the beginning, and has already started working on 
its 2004 privatization program (2003 was the first year in 
which it had a formal program). 
 
 
¶20.   (SBU) Challenges remain. The PA is unable to provide 
purchasers with zoning variances lasting more than five years 
Also, a recent (and generally favorable) World Bank report 
makes a number of criticisms: SEE profits and privatization 
sale proceeds have been used to finance the unprofitable 
holdings rather than being returned to the Treasury and used 
to retire debt (pending legislation should solve this 
problem); the requirement that the Privatization High Council 
approve all sales has forced even small divestitures to be 
recycled several times, significantly lowering their value 
and reducing transparency; and a few particularly sensitive 
privatizations (e.g., Turk Telekom are not controlled by the 
PA.  From a broader policy perspective, the seemingly 
single-minded focus on maximizing the proceeds from 
privatization in some cases deters market liberalization and 
competition, as protected or dominant market positions are at 
least partially passed on to the new owners (e.g., Tekel, 
Tupras). 
EDELMAN